Maintain ‘neutral’ on Bosch with TP of Rs 13,000

Bosch’s (BOS) 2QFY21 performance was impacted due to adverse forex, product mix and non-recurring cost. We expect faster growth on account of strong tractor demand, addition of 2W segment and content increase. BOS’s stock price is largely reflecting all the negatives, but a re-rating catalyst may emerge within 2-3 quarters, in our view We have downgraded our FY21/FY22EEPS by 19.4%/7.2%to reflect high RM costs (unfavorable product mix). Maintain Neutral with TP of ~INR13,000.

Revenues grew 7% YoY to INR24.8b while EBIDTA/Adj. PAT declined ~14.5%/24% YoY to ~INR2.9b/INR 2.4b. BOS’s 1HFY21 revenue/EBIDTA/Adj. PAT declined ~31.5%/77.4%/63.2%. Auto revenues grew 9% YoY, driven by ~7% growth in powertrain and double-digit growth in the 2W business. Non-Auto revenues fell ~3%, impacted by weakness in project-driven business of solar/security technologies. Gross margin declined 400bp YoY to 59.4% due to adverse forex and mix (high traded goods, low diesel contribution). Further, higher other expenses (COVID related as well as some non-recurring costs) translated to EBIDTA margin contraction of 300bp to 11.6% (v/s est. 015.7%), impact of which was diluted by lower staff costs. Restructuring expenses in 2QFY21 was ~INR4b (cumulative ~INR13.1b).There is one last tranche of restructuring cost left, which would be marginal. It has seen ~1,000 blue collar employees taking VRS offer.

Oct’20 was better than Sep’20 with very good order book for 3QFY21. Outlook has improved and BOS is now looking at volumes for tractors at 800-850k (v/s earlier est. 450k), M&HCVs at 140-150k (v/s earlier 110k), LCVs at 400k (v/s earlier 270k), and PVs at 2.8m (v/s earlier 2.25m). Diesel share for PVs stands at 22% now. BOS’ order book is full for 3QFY21 with expectation of double-digit growth. Diesel in UV1-2 is robust and some OEMs might return to diesel. BOS has invested ~INR148m to acquire 7.14% stake in a start-up, Routematic (Nivaata Systems), which is focused on urban mobility. Further, it is partnering with Sun Mobility. BOS’ parent has recently acquired 26% stake in Sun Mobility. Capex for FY21 is expected at INR2.3-2.4b.

Valuations at ~39.2x/27.5x FY21/FY22E EPS largely factor in the potential market share loss during the BS6 transition. While negatives are priced in, catalysts might take 2-3 quarters to emerge. Maintain Neutral with TP of INR13,000 (~28x Sep’22E EPS).